VAT due and input VAT – definitions
Let’s start by clarifying these two terms:
1. Output tax – the amount of tax that should go to the Treasury as a result of the sale of goods and services. How to calculate the tax due? The net amount of goods sold should be multiplied by the appropriate tax rate (in most cases it is 23%).
EXAMPLE
If – as an entrepreneur – you sell goods for a net amount of PLN 20,000, and the tax rate is 23%, the output tax is PLN 4,600. This is easily calculated by substituting into the following formula:
(2) Input tax – persons conducting business and who are also active VAT taxpayers have the opportunity to reduce the amount of output tax by input tax. Input tax results from goods and services purchased by an entrepreneur in connection with his business activities.
The amount of input tax can be the product of many factors. One of them (the most popular) is the tax paid by the entrepreneur in connection with purchases for the company (every product or service includes VAT). However, if a business wants to reduce the amount of VAT to be paid in this way, it should confirm the purchases with an invoice or other document confirming the transaction.
Another option to reduce VAT is to import goods. The amount of input tax is the resultant of a simple equation: from the amount of tax due on the domestic supply of goods, we subtract the tax on the import of goods. In this case, an import declaration or customs document will be needed for confirmation.
We can also include as input tax the lump-sum tax refund for the purchase of agricultural products related to taxable supplies, the amount of output tax resulting from the intra-Community supply of goods, as well as the provision of services for which the taxpayer is (respectively) their purchaser or recipient.
However, the entrepreneur will not always be able to deduct VAT. Find out under what conditions you can reduce the amount of VAT payable.
When is VAT deductible?
First: a business can reduce the VAT due only if it is an active (active) VAT taxpayer. So if a company does not pay VAT, for obvious reasons it cannot reduce it either. The same is true if the entity has been exempted from VAT or is not in business.
Second: a businessman cannot deduct VAT if the purchase he has made is not directly or indirectly related to his business. If you have doubts about whether you can qualify an item or service as business-related, ask your accountant or use the ORD-IN or ORD-WS form on the Ministry of Finance website to obtain an individual tax interpretation. Remember, however, that the Director of the Tax Chamber to which you submit your application has as many as 90 days to respond.
Third: in Art. 88 of the Value Added Tax Law lists the types of services and goods that cannot be the basis for a reduction in the amount of VAT – these include, for example, accommodation and catering services, although with certain exceptions.
Input and output VAT by example
Ms. Emilia runs a sole proprietorship – she repairs electronic equipment. In the previous month, it made service sales totaling PLN 14,150 net. The VAT due in this case is PLN 3,254.5 (we multiplied the net amount by the tax rate of 23%).
In the same month, Ms. Emilia purchased the measuring machine necessary for her business, as well as a number of preparations and a small set of tools. The total amount of purchases was PLN 7,900 net (PLN 1,817 VAT).
To calculate the amount of tax to be paid, Ms. Emilia must subtract the amount of input VAT from output VAT: PLN 3,254.5 – 1,817 = PLN 1,437.5
Ms. Emilia will therefore pay VAT of PLN 1,437.50 to the Tax Office – and she will have to do so by the 25th of the month following the month in which she made the purchases.
Important!
If Ms. Emilia had made business purchases in excess of sales, the input VAT would have been higher than the output VAT, resulting in a negative equation.
In such a situation, the excess of input VAT over output VAT can be carried forward to the next accounting period, which means that Ms. Emilia will also pay less VAT in the following month or quarter.
Time limit for VAT deduction
It’s useful to know when to deduct VAT so that you don’t miss the opportunity to reduce the tax payable. The clock starts timing when the invoice is received. So if you purchase a product or service for business use and find out that an invoice has been issued, the event does not affect the timing of the tax deduction.
You can do this only from the moment you receive the invoice, for two or three consecutive accounting periods: three if you use monthly accounting or two if you account for VAT quarterly.
EXAMPLE
Ms. Emilia settles VAT every month. She purchased the aforementioned machine on April 29, and received the invoice on May 1. This means that he can deduct VAT in May (the current accounting period), June, July or August (the next three).
